The Book that will Reshape the Study of Economics

The Book that will Reshape the Study of Economics

Books that make an impact lasting for decades – even centuries – are rarer than hens’ teeth. In economics, they can be counted on one hand: The Wealth of Nations by Adam Smith, Karl Marx’s Das Kapital, Keynes’s The General Theory of Employment, Interest, and Money and perhaps Friedrich Hayek’s The Constitution of Liberty or The Road to Serfdom or Milton Friedman’s Freedom and Democracy.

Rarer still is to see a work ascend to the status of a classic almost instantaneously following its publication. Such a work is Thomas Piketty’s Capital in the Twenty-First Century. It is almost certain that its impact will last for decades. A century hence, it may be a cornerstone of economic and political debate and discussion, much as Smith’s, Keynes’s and Hayek’s works are today.

Piketty’s work swiftly catapulted to prominence in the United States. A red carpet had inadvertently been rolled out for it – almost, it seems, in anticipation that a monumental work would enter the stage – by a groundswell of articles, debate and hand-wringing about inequality. The Occupy Wall Street movement and its slogan, “We are the 1%,” largely fizzled out for lack of an agenda, but it drew the attention of a significant number of sympathetic economists and public intellectuals. Driven chiefly by the writings of economics Nobel laureate Joseph Stiglitz, inequality has become a central focus of discussion – especially among those of the political left – and even served as the subject of a speech by President Barack Obama. It was this theme that led to Bill de Blasio’s election as mayor of New York City.

Piketty is clearly an intellectual of the political left, but that is not why his weighty tome will achieve the lasting impact that it is certain to have. Those who focus on what they think are the book’s political goals are missing the point – though so far, surprisingly few have done so. The book uses data to develop a framework for its analysis that will embed it firmly in the intellectual history of the coming decades, if not the coming centuries.

What Piketty’s book is not – and why it is not

In the book’s introduction, Piketty recounts his history of having been hired by a university “near Boston.” (It was MIT, though he doesn’t mention it.) There, he says – perhaps euphemistically – he found the work of U.S. economists “not … entirely convincing.”

He looked forward to returning to his home country of France, he says: “There is one great advantage to being an academic economist in France: here, economists are not highly respected in the academic and intellectual world or by political and financial elites. Hence they must set aside their contempt for other disciplines and their absurd claim to greater scientific legitimacy. … In France, I believe, economists are slightly more interested in persuading historians and sociologists, as well as people outside the academic world, that what they are doing is interesting.”

His work thus falls not into the field of economics per se, but into the field that used to be called political economy. He uses almost no mathematics. Yet as I will show, the mathematics that he does use is crucial.

Piketty justifiably attacks the heart of U.S. economics, criticizing both its mathematical pretense and its vaunted evidence-based scientific discipline:

For far too long economists have sought to define themselves in terms of their supposedly scientific methods. In fact, those methods rely on an immoderate use of mathematical models, which are frequently no more than an excuse for occupying the terrain and masking the vacuity of the content. … Economists today are full of enthusiasm for empirical methods based on controlled experiments. … But these new approaches themselves succumb at times to a certain scientistic illusion. It is possible, for instance, to spend a great deal of time proving the existence of a pure and true causal relation while forgetting that the question itself is of limited interest.

In contrast to many economics papers, articles and books, Piketty’s 577-page book, followed by pages of notes, focuses on only three simple formulas:

? = r × ?, which he calls the “first fundamental law of capitalism,” where ? is the share of income from capital in national income, r is the rate of return on capital and ? is the capital/income ratio.

? = s / g, the “second fundamental law of capitalism,” where s is the savings rate as a percent of income and g is the rate of growth of national income.

r>g, which is not a law but an empirical observation that he claims to show by theoretical arguments to be usually true.

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